ACIT-6(1)(2), MUMBAI, MUMBAI vs. IMPERIAL CONSULTANTS AND SECURITIES PVT LTD, THANE

The brief facts of the case are that the assessee is a company engaged in the business of financing and holding strategic investments in group companies engaged in telecom, retail and service sectors. The assessee filed its return of income for Assessment Year 2013-14 declaring nil income. During the assessment proceedings, the Assessing Officer observed that the assessee had earned interest income of ₹59.47 crore from inter-corporate deposits, loans and debentures, which was offered under the head "Income from Other Sources". Against this income, the assessee claimed deduction of interest expenditure of ₹462.18 crore under section 57 of the Act. The Assessing Officer held that the assessee had failed to establish any direct nexus between the borrowed funds and the earning of the interest income and further observed that the assessee itself had taken a stand that the expenditure was allowable under section 36(1)(iii) of the Act as business expenditure rather than under section 57 of the Act. Since no material was produced to establish that the expenditure was incurred wholly and exclusively for earning the interest income assessed under the head "Income from Other Sources", the deduction amounting to ₹462.18 crore was disallowed by the Assessing Officer. The Assessing Officer also disallowed the expenditure of ₹203.75 crore being the interest expenditure which had been disallowed in Assessment Year 2012-13 under section 40(a)(ia) of the Act, although the assessee claimed that the tax deducted at source had been paid during the relevant previous year and, therefore, the deduction had become allowable in Assessment Year 2013-14. The Assessing Officer rejected the contention by observing that the expenditure itself had not been allowed in the earlier year. Further, although the assessee had already made a voluntary disallowance of ₹151.81 crore under section 14A while computing its income, the Assessing Officer, consequent to the disallowance of the entire interest expenditure, recomputed the disallowance under Rule 8D and made a further addition of ₹18.77 crore under section 14A of the Act despite the exempt dividend income being only ₹14.06 lakh. 3. In appeal, the learned CIT(Appeals) first observed that the Assessing Officer had examined the claim only from the perspective of section 57 of the Act and had not adjudicated the assessee's alternative claim that the same interest expenditure was allowable as business expenditure under section 36(1)(iii) of the Act. The CIT(Appeals) noted that the assessee was engaged in financing and investment activities and similar issues had arisen in its own case for Assessment Year 2012-13. The Mumbai Bench of the Tribunalin ITA No. 3529/Mum/2018 vide order dated 17.12.2019, while deciding the assessee's appeal for Assessment Year 2012-13, had already laid down the manner in which the allowability of interest expenditure was required to be examined. The Tribunal had directed the Assessing Officer to identify interest relating to advances made in earlier years, interest relating to advances made during the relevant year, and interest corresponding to taxable interest income, while also holding that where no direct nexus could be established, proportionate interest expenditure should be considered as allowable under section 36(1)(iii) of the Act. Since the facts for the year under appeal were substantially similar, the CIT(Appeals) held that judicial consistency required the same approach to be followed. Accordingly, CIT(Appeals) restored the matter to the Assessing Officer with specific directions to recompute the allowable interest in accordance with the methodology prescribed by the Tribunal in the earlier year and to grant adequate opportunity to the assessee to furnish supporting calculations and evidence. Thus, the CIT(Appeals) did not delete the disallowance of ₹462.18 crore but set aside the issue to the Assessing Officer for fresh verification in accordance with the earlier Tribunal order. With regard to the disallowance of ₹203.75 crore under section 36(1)(iii) read with the first proviso to section 40(a)(ia), the CIT(Appeals) observed that the assessee's claim depended upon verification of whether tax deducted at source had in fact been deposited during the relevant previous year and whether the expenditure had become allowable in accordance with the statutory proviso. Since the Assessing Officer had rejected the claim merely by relying upon the assessment order of the earlier year without carrying out the necessary factual verification, the CIT(Appeals) again restored the issue to the Assessing Officer for fresh examination and directed him to verify the claim in accordance with law after providing due opportunity to the assessee. Accordingly, the CIT(Appeals) remanded the issue to the Assessing Officer for proper verification, which has been challenged by the Revenue before the Tribunal.

On the issue of disallowance under section 14A of the Act, the CIT(Appeals observed that the assessee had earned exempt dividend income of only ₹14.06 lakh during the relevant year and had already made a substantial voluntary disallowance while computing its income. He further held that the additional disallowance of ₹18.77 crore made by the Assessing Officer was contrary to the settled legal position that the disallowance under section 14A of the Act cannot exceed the amount of exempt income earned during the year. The CIT(Appeals) held that the amendment made by the Finance Act, 2022 to section 14A of the Act is prospective and does not apply to earlier assessment years. He also held that on identical facts in the assessee's own case for Assessment Year 2012-13, the Tribunal had upheld the deletion of a similar disallowance after observing that the assessee had already disallowed the relevant expenditure in its computation of income. Following the same reasoning, the CIT(Appeals) deleted the addition of ₹18.77 crore made under section 14A of the Act.

Thus, the impugned appellate order is based on three findings. First, the CIT(Appeals), following the earlier order of the Mumbai Tribunal in the assessee's own case, restored the issue relating to allowability of ₹462.18 crore of interest expenditure to the Assessing Officer for fresh adjudication under section 36(1)(iii) and for proportionate allocation wherever direct nexus was not available. Secondly, CIT(Appeals) restored the issue relating to deduction of ₹203.75 crore under section 40(a)(ia) for fresh factual verification. Thirdly, he deleted the disallowance of ₹18.77 crore under section 14A by holding that the disallowance could not exceed the exempt income earned during the year and the assessee had already made an appropriate voluntary disallowance. The Department is in appeal before us against the order passed by CIT(Appeals). 6. At the outset, the learned Departmental Representative submitted that the learned Faceless CIT(Appeals) exceeded the powers conferred under section 251 of the Act by setting aside the assessment order. The Ld. DR contended that the assessment had been framed under section 143(3) read with section 144C on the basis of the order passed by the Transfer Pricing Officer under section 92CA(3) of the Act and, therefore, the learned faceless CIT(Appeals) had no jurisdiction to restore the matter to the file of the Assessing Officer.

We have considered the submissions of the learned Departmental Representative and perused the material available on record. We are unable to accept the contention of the Revenue that the learned CIT(Appeals) exceeded the powers vested in him under section 251 of the Act by setting aside an order based on the determination of the Arm's Length Price by the Transfer Pricing Officer under section 92CA(3) of the Act. A reading of the impugned appellate order shows that no issue relating to transfer pricing or determination of the Arm's Length Price was either examined or adjudicated by the learned CIT(Appeals). On the contrary, in paragraph 4.1 of the appellate order, the learned CIT(Appeals) has specifically observed that during the course of assessment proceedings, the Assessing Officer noticed that the assessee had earned interest income of ₹59.47 crore, claimed deduction of interest expenditure of ₹462.18 crore under section 57 of the Act, disallowed the claim under section 57(iii), rejected the deduction of ₹203.75 crore claimed under section 36(1)(iii) read with the first proviso to section 40(a)(ia), and recomputed the disallowance under section 14A at ₹18.77 crore. Thus, the very factual foundation of the appellate proceedings, as recorded by the learned CIT(Appeals), pertains to the allowability of interest expenditure and the disallowance under section 14A and not to any transfer pricing adjustment.

With respect to the remaining Grounds of Appeal, we have heard the rival submissions and perused the material available on record. We find that the learned CIT(Appeals) has passed a detailed, reasoned and speaking order after examining the assessment records, the submissions of the assessee, the relevant statutory provisions and the judicial precedents governing the issues involved. The findings recorded by the learned CIT(Appeals) are neither arbitrary nor based on any extraneous consideration but are founded upon the material available on record.

Insofar as the disallowance of interest expenditure of ₹462.18 crore is concerned, we find that the learned CIT(Appeals) has not granted any outright relief to the assessee. Instead, after noticing that the issue had already been examined by the Mumbai Bench of the Tribunal in the assessee's own case for Assessment Year 2012-13 in ITA No. 3529/Mum/2018 vide order dated 17.12.2019, he directed the Assessing Officer to examine the issue afresh in the light of the binding directions issued by the Tribunal. The learned CIT(Appeals) has specifically directed the Assessing Officer to work out the interest relatable to advances made in earlier years, advances made during the relevant previous year and the interest corresponding to taxable interest income and thereafter determine the admissible deduction. He has further directed that wherever a direct nexus is not identifiable, the claim shall be examined in accordance with the directions of the Tribunal regarding proportionate allowance under section 36(1)(iii) of the Act. Thus, the learned CIT(Appeals) has not substituted his own findings but has only ensured implementation of the earlier order of the Coordinate Bench in the assessee's own case on same facts. We, therefore, find no infirmity in such an approach.

Similarly, in respect of the disallowance of ₹203.75 crore under section 36(1)(iii) read with the first proviso to section 40(a)(ia) of the Act, we find that the learned CIT(Appeals) has merely directed factual verification regarding payment of tax deducted at source and the verification of deduction in accordance with law. The Assessing Officer had rejected the claim without carrying out the necessary verification contemplated under the proviso to section 40(a)(ia) of the Act. The direction issued by the learned CIT(Appeals) merely requires the Assessing Officer to verify the factual correctness of the assessee's claim before arriving at a conclusion. Accordingly, we find no infirmity in the order of Ld. CIT (Appeals) so as to call for any interference.

As regards the addition made under section 14A of the Act, we find that the learned CIT(Appeals) has rightly taken note of the undisputed fact that the assessee had earned exempt dividend income of only ₹14.06 lakh during the relevant previous year and had already made a substantial voluntary disallowance while computing its total income. The learned CIT(Appeals) has thereafter applied the settled legal principle laid down by the jurisdictional High Court and other binding judicial precedents that the disallowance under section 14A cannot exceed the exempt income earned during the year and the amendment introduced by the Finance Act, 2022 is prospective in operation. He has also followed the decision rendered in the assessee's own case on identical facts. The Revenue has not been able to demonstrate either any distinguishing facts or any subsequent binding precedent taking a contrary view. Therefore, no interference with the findings recorded by the learned CIT(Appeals) is called for. 12. In the result, the appeal of the Revenue is dismissed.